EC2102 Macroeconomic Analysis I Tutorial 2, Week 5 (February 7-11, 2011) Question 1 (This is a continuation of Question 1 of Tutorial 1) ( v ) What is the equilibrium real rate of interest at which the credit market clears? Express your solution as a function of , and show that dr =d& <0 : What is the economic interpretation of dr 0? ( vi ) Let = 0 : 8 . Explicitly solve for Mr A and B and savings. Who is a saver? And who is a lender? Explain why Mr A and Mr B both have a ±at consumption pro²le (they consume the same amount each period). ( vii ) Now illustrate your solution to Mr A using graphs, and in particular, where is the endowment point relative to their optimal consumption bundles? ( viii ) De²ne a competitive equilibrium in this economy. ( ix ) Why is the equilibrium ³competitive´? Explain why we only need to check that either the credit or goods market clears. Question 2 Consider an economy with only 2 individuals, Mr A and Mr B . They each live for 2 periods only; they are both young in period 1 and old in period 2, and they die

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